Malibu Boats Inc (MBUU) 2016 Q3 法說會逐字稿

Good morning and welcome to Malibu Boats' conference call to discuss third-quarter fiscal 2016 results.

(Operator Instructions).

Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Malibu Boats.

As a reminder, this call is being recorded.

On the call today from management are Mr. Jack Springer, Chief Executive Officer; and Mr. Wayne Wilson, Chief Financial Officer.

I will turn the call over to Mr. Wilson to get started.

Please go ahead, sir.

Thank you, and good morning, everyone.

Ritchie Anderson, the Company's Chief Operating Officer, is also on the call today.

Jack will provide commentary on the business, and I will discuss our third-quarter financials and outlook for fiscal 2016.

We will then open the call for questions.

A press release covering the Company's third-quarter results was issued this morning, and a copy of that press release can be found in the investor relations section of the Company's website.

I also want to remind everyone that management's remarks on this call may contain forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking, and that actual results could differ materially from those projected on today's call.

You should not place undue reliance on these forward-looking statements, which speak only as of today.

And the Company undertakes obligation to update them for any new information or future events.

Factors that might affect future results are discussed in our filings with the SEC.

We encourage you to review our SEC filings for a more detailed description of these risk factors.

Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted EBITDA margin, and adjusted fully distributed net income.

Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release.

I will now turn the call over to Jack Springer.

Thank you Wayne, and welcome to our third-quarter call.

Malibu again met our financial objectives.

Net sales increased 6%.

Adjusted EBITDA margin remains strong at 20.6%, and adjusted fully distributed earnings increased 18% to $0.40 per share.

Through a disciplined operating strategy, we continue to execute at a high level, and perform well despite substantial international headwinds and an uncertain economic environment.

This is the ninth consecutive quarter where we delivered our overall financial results that were in line or better than our internal forecast.

We are particularly pleased in our ability to deliver results in spite of some lower volume numbers.

And we believe that is a testament to the numerous new products and vertical integration initiatives that we have put in place over the last few years.

As we have discussed on the last several earnings calls, the US market as a whole remains healthy.

After four years of double-digit growth rates in the US -- in US unit registrations, we believe the growth rate for 2016 is likely to be in the mid- to high-single digits, despite the robust calendar first quarter.

We know the recent monthly registration data has been above this rate, but the seasonal period covered by this information is a relatively small sample size.

In addition, we believe that the warm weather has accelerated boat registration substantially into the first quarter and early second-quarter.

As an example, Malibu set a record for the number of calendar Q1 registrations.

We expect that registrations going forward will moderate and bring the growth back to our projected growth estimates over the course of this year.

Speaking regionally, each major region is influenced by its own set of variables.

California and the upper Midwest continue to benefit from higher lake levels.

Houston and West Texas are impacted by the decline in oil prices.

But our two largest markets of Dallas and Austin/San Antonio continue to benefit from growing populations and diverse economies.

From south to north, the warmer weather has had an impact on early registrations.

The international markets have been weaker than expected this model year.

The international markets are a point of concern that we continue to focus on.

We do not see near-term relief, but are hopeful that the moderation in the US dollar rally will give stability to the international business.

Low oil prices, foreign currency valuations, or a combination of the two, along with severe economic issues for certain countries in areas of the world continue to weigh on the international markets.

Canada in particular is being impacted by both low oil prices and weak exchange rates, and it is the largest of our international markets, outside of Australia.

Over the past few months, we have seen further weakening in the demand trends in Canada.

Other international markets, such as South America, Europe, and Asia, continue to be impacted primarily by low currency valuations.

We have tried to offset this through promotions and discounting, but this is not a healthy long-term solution to drive volume or profitability in the international markets, and we plan to scale back on this practice.

In this environment, our view is that the discounts are not really giving material volume, but giving away margin dollars and percentage.

We will continue to watch trends and adjust our strategy to ensure we maximize the efficiency in servicing the international market going forward.

Our wholesale domestic business, due to the strength of the overall US market, has largely compensated for the weakening international markets.

However, with domestic growth not being as robust, and weaker-than-anticipated international markets, the pendulum has shifted -- shifting to more modest growth.

Our international dealers have aggressively managed their inventories as the international markets have declined.

And it is our view and our US dealers' views use that inventories in the US are sufficient and should not go higher at this time.

Malibu has made the decision to maintain discipline and make it certain that channel inventory remains healthy as a result of the lower-than-expected international shipments combined with the moderating US growth.

In June, our last fiscal month of the year, we will be reducing the production rate for model year 2016 product.

We have always been very disciplined in how we manage and execute the business; and as you can see, this will not change.

We met our profitability targets with adjusted EBITDA and earnings per share.

That is a spotlight on our discipline, efficiency, and the abilities us the best operator in the marine space.

It starts with a commitment to being the industry leader in performance, quality, and innovation, in the performance sports boat category.

We will not compromise the quality of our boats, or lose focus on who we are.

What we will do is continue to lead the industry when it comes to technology, innovations and features.

We will offer the best integrated wake and surfing package on the market.

We will drive demand and support our dealers through the launch of several new boats per year, while also partnering with them to make sure channel inventories remain healthy.

We will raise quality and lower cost through vertical integration.

And we will maintain high margins and return on capital rates through disciplined planning and production process.

We know exactly who we are, and what our role is in the market.

We are the number-one market leader.

We build the highest-quality boat.

And significantly more of every boat that we build is built in-house versus our competitors due to vertical integration.

This creates a value that is unmatched.

Our retail pricing is lower than our major competitors.

That is due to better BOM costs and labor per-unit costs we achieve through our operational efficiency, along with vertical integration.

Over the past five years, we have increased our number-one market share to 32% from 24.4%.

During this time, we built Axis from scratch into the number-one brand in the entry-level segment, and the number-four brand overall, with an 11% share of the total market in calendar year 2015.

We have also established the Malibu brand as the leader in the premium segment, with a 250 basis point market share lead over the next leading premium offering.

Malibu is the leader in market share for the premium segment, the entry-level segment, and the total performance sports boat market.

Looking forward, our foresight to bring the full product offering has established the Axis brand as the clear leader in the entry segment and we are very well-positioned to benefit from strong growth in this area of the market.

The premium side of the market has grown slower than the entry side recently.

But the size of the premium segment still represents about two-thirds of the entire market volume.

The strong position of the Axis brand is allowed us to pivot our new product introductions to the Malibu brand, focusing on higher volumes.

The last six months of retail data is strong for Malibu and Axis.

The most recently available data from October through March shows Malibu and Axis captured 66.5% of every incremental unit sold year-over-year.

That is outstanding.

We have focused this model year on new launches and introductions in the Malibu brand, and we believe that will generate demand and growing market share trends in the premium segment.

Demand for our new Malibu 25 LSV has been superb.

The acceptance and orders for this boat remains strong.

The new Malibu M235 is driving traffic and creating buzz around the boat model itself, and the Malibu brand.

During boat shows, we believe the M235 was the most viewed product in the entire performance sports boat segment.

It is doing as we expected.

It is the premium boat on the market for the most discernible user.

Now, it will never be the best-selling boat in a given year.

We believe that the 23 LSV will continue its dominance at the best-selling performance sports boat for the seventh year running, and the M235 will be an in-demand boat for those people who desire the absolute best of everything in their life.

I will speak for moment on the new product that will be introduced in model year 2017, which begins in July.

We have said and we have executed on delivering four new boats per year.

We will do that again in model year 2017.

We believe our product roadmap is laid out nicely with market conditions.

Two of our boats for model year 2017 are focused within a segment where we are substantially underrepresented.

And the other two boats are good candidates for both domestic and international markets, where they have the potential to stimulate demand in weak markets.

Three of the boats will be introduced around the beginning of Q1, and the fourth introduction will be in Q2.

We will speak more in-depth about the new model year product for 2017 on our next call.

With the recent product instructions on the Malibu side and the continued building of the Axis brand, we are well positioned to continue gaining share in both the US and the global markets.

However, with the expectation that the international markets remain weak, and the US market growth will be below the double-digit rates that we have seen recently, we will manage the business closely to keep channel inventory clean and margins high.

This is our mindset, and this should put us in a strong position to continue growing the business and earnings in fiscal 2017.

I mentioned earlier, we believe we are the best operator of performance sports boats.

We manufacture one-third more boats than our nearest competitors.

We build significantly more of them in-house through vertical integration, and we do it with less employees per unit.

Our margins are higher when compared on an apples-to-apples basis than anyone in our segment.

We are proud of the initiatives we have implemented over the past few years that can provide a strong performance when the market does not meet our expectations.

Our manufacturing of trailers, which began this model year, is a great example.

We were able to take a whole new business, make the product much better, offer savings through our dealers and customers, and generate a new profitable business that has been executed near perfectly.

We continue to focus on new opportunities to enhance shareholder value.

Recently, a second major marine manufacturer licensed our valuable Surf patent portfolio.

Needless to say, we continue to work behind the scenes on similar initiatives in order to continue on our track record of strong execution as the industry's best operators.

We are excited for the future.

In summarizing my remarks, the international has been a headwind, and is worse, with no expectation for a near-term turnaround, but the hope for more stability.

Domestic business continues to be solid, although the unit growth rate will not likely be in the double digits.

Over the last six months, in the strong retail market, Malibu has dominated the new unit generation and market share.

Our new product has performed very well, and as we told you, we will again bring four new boats on time and focused in our core segment for model year 2017.

Because we believe we are the best operator of performance sports boats out there, we continue to be focused on consistent long-term execution, and are confident that we will drive success despite market factors we cannot control.

I will now turn the call over to Wayne to take you through the quarterly results in more detail.

Thanks, Jack.

Our third-quarter results were in line with our expectations.

It is important to note that the third quarter is the first full quarter to contain our Australian business results in both the current and year-ago periods.

With that said, net sales in the third quarter increased 5.8% to $68.5 million.

Unit volume decreased 2.6% to 955 boats, including 78 units from Australia.

While unit volume was slightly below our expectations, revenues were about what we expected, given the strength in our new, larger, more expensive models.

Both Malibu and Axis performed well in the quarter, with Malibu representing approximately 68% of unit sales at 650 units, and Axis representing 32% of unit sales at 305 units.

Consolidated net sales per unit increased 8.6% to approximately $71,769.

The increase was primarily driven by year-over-year price increases and a higher mix of larger models, with more optional features.

Gross profit in the quarter increased 2.8% to $18.4 million, and gross margin decreased 79 basis points to 26.9%.

The decrease in gross margin was primarily driven by international discounting and gross margin pressure in our Australian unit.

Selling and marketing expense decreased 5% to $1.6 million in the third quarter.

As a percentage of sales, selling and marketing expense decreased about 26 basis points to 2.3%.

General and administrative expenses, excluding amortization, decreased 27.1% to $4.5 million.

As a percentage of sales, G&A expenses decreased 295 basis points to 6.5%.

The decrease was primarily due to a decline in legal acquisition offering related costs, which in the third quarter last year related to our Nautique litigation, Australian acquisition, and the tender offer completed in April 2015.

This was partially offset by higher stock compensation expense associated with share-based equity awards that were granted in the second quarter this year.

Adjusted EBITDA for the quarter increased 6.2% to $14.1 million, and adjusted EBITDA margin increased 10 basis points to 20.6%.

Both were in line with our expectations despite the impact of international discounts.

Non-GAAP adjusted fully distributed diluted earnings per share increased 17.6% to $0.40.

The increase in adjusted fully distributed diluted earnings per share was driven by [14.5] decrease in the number of fully distributed diluted shares to 19.4 million, and assumes a normalized C-Corp tax rate of 35.5%.

For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP measures, please see the tables in our earnings release.

Our third-quarter results were in line with our expectations, and we are modestly changing our outlook for fiscal 2016.

As Jack mentioned, our international volumes have been negatively impacted versus our expectations, despite our efforts to support the markets through discounting.

Driven by significant de-inventorying in the channel, wholesale international shipments are down over [20%] year-over-year.

That, combined with what we believe to be a slightly slower US retail growth rate for calendar 2016, and what we believe is a more uncertain economic environment, leads us to lower our volume growth forecast for fiscal 2016.

While early retail registration data is strong in the US, we believe a prudent US unit growth rate for 2016 is likely mid- to high-single-digits.

When you look at the growth rate combined with the negative wholesale volumes internationally, our US business segment would be up in the low-single-digits this year.

This will enable us to ensure that channel inventories remain appropriate.

While we continue to be cautiously optimistic about favorable secular trends in the US market, the current-year impact of the headwinds in several international markets such as Canada, Europe, South America, and South Africa has been substantial.

We do not provide detailed or earnings guidance.

But our outlook for fiscal 2016 is based on the following factors: an increase in unit volume in the low- to mid-single-digits.

From a volume mix perspective, Axis is expected to represent a proportion of unit sales slightly higher than fiscal 2015.

Consolidated net sales per unit is expected to increase in the mid-single-digits for the full year, driven by our mix of larger boats.

Gross margin is expected to be slightly down for the full year, driven by our international discounting and the impact of lower Australian gross profit margin.

Legal expenses relating to the MasterCraft litigation are expected to be $1 million to $1.5 million for the year.

Adjusted EBITDA margin is expected to be essentially flat.

Finally, regarding capital expenditures, we should come in a little over $6 million in spend.

In closing, let me just say that we are pleased with our third-quarter results in spite of the tough international markets.

The successful initiatives that we have implemented over the prior few years have helped offset market weakness.

Recent indications in international markets give us hope for more stability going forward, and we do not plan at this time to offer material discounting to support these markets.

We are very pleased with the strong response to our 2016 product portfolio and the impact we believe it is having on market share.

We believe the US market continues to grow, and would like our competitive position.

Prudent actions now to maintain healthy domestic inventory levels, and a strong 2017 model year product pipeline should set us up for strong financial performance in fiscal 2017.

With that, we would like to open the call to questions.

Operator?

(Operator Instructions).

Joe Hovorka, Raymond James.

Just a couple of quick questions on your international business.

It sounds as if the gross margin down slightly, versus up slightly last quarter, is all related to the international markets.

Is that correct, increased discounting there?

Yes.

So the dollar has weakened over the last three months.

Is it an issue more of end market demand being weaker than you expected, as opposed to FX?

I would have thought the FX move would have been somewhat of a positive maybe for demand and for gross margins.

We think that it will be.

We have not seen that yet, Joe.

What we are hoping for first is stability, and that is going to be the first stage of it.

Then I think if that currency can hold or drop further, then we will start seeing increased demand, but we have no idea when that will occur.

Okay, so the increased promos that you're doing right now, or the increased incentives on the international market, would have been just because the retail continues to lag.

Yes.

Okay.

And there are -- another public boat company that does not compete in the ski segment or the wakeboard segment -- they actually commented that their Canadian business was starting to pick up.

Is that a -- is it geographic differences, maybe?

Is it because they are in a different segment, and maybe we will see it somewhere first and then it will gravitate towards your segment?

Or what would cause some of those differences, or maybe the way you think about that?

So, I think you're exactly accurate.

And the regionality does play into effect.

I think the Company that you are referring to seeing growth out of a different region, the East region.

In our case, we have a very strong business, and have always had a very strong business in the Western Canada.

That has been pretty drastically affected by the oil and gas drop as well as the currency.

Eastern Canada, for us, is a smaller market then Western Canada, by far.

Yes, Joe, this is Wayne.

So I think there's probably -- to Jack's point and to your question -- the geographic mix issue, as well as our dealers have been very disciplined in terms of that maintaining appropriate inventory levels there.

So, that has been something that has exacerbated the volume issue at wholesale, because they have brought down those inventory levels to match that retail demand.

Okay, great, thanks guys.

That's all I had.

Mike Swartz, SunTrust.

Just to piggyback on Joe's last question regarding Canada, can you maybe give us a little color where inventory levels stand today?

And just given the deceleration in the wholesale shipment volume we have seen the last couple quarters, should we expect that same rate to continue over, call it, the next six, nine months?

I don't think we should expect a deceleration.

I think we've dealt with -- we have probably taken 100 units out of the channel internationally over the past 24 months; so probably split relatively evenly between the last two fiscal years.

And so when you look at that, and when the US was growing at a higher rate, it was easier for the US to absorb that.

But with an expectation that in calendar 2016, the US will be a little bit below the growth rate that was experienced in calendar 2015, it is just not prudent for us to try and have that be absorbed into the domestic channel.

And perfect segue, just talking about the US market, we have obviously seen, as you have indicated, the strong growth in the first quarter.

What is giving you kind of pause that the US does not hit double-digit unit volume growth this year?

Is it something that you have seen in April, and going into May, that gives you a little pause?

Now, going into May, we really have not seen anything.

I think April, we are going to find that that was also pretty strong month.

If you talk to the various people in the marine industry, and they project out what they think they see for 2016, they're predicting single digits, not double digits anymore.

The second factor that I do believe is in play is because of the warm weather, people are registering those boats in taking those boats a little bit quicker, so I believe we are seeing a shift.

And to add to that, Mike, I think if you look at just the general trend, 2014 was a 16% grower.

2015 was a 10% grower.

I think we look at it and say, that trend is 2 data points, and maybe it is not a trend.

But there is little bit of a downward slope.

It is still growing -- and that is what we wanted to make sure we communicated in our comments -- and growing well.

But when you look at last year, as an example, if there was a warmer spring -- we look at the growth rates that we have seen and analyze those growth rates in calendar 2016 today.

And pulling forward 3% of Q2 registrations would result in the growth rates that we are seeing today.

So, it's not crazy to think that the high growth rates that we are seeing in Q1 could be a very modest pull-forward of that registration activity.

But wouldn't the offset to that be, as well, that you haven't seen the full-year impact of better water levels, weather -- however you want to qualify it -- in places like Texas and California that are very big states for you?

So I would assume that there should be, for lack of a better word, some cushion based on that alone.

We would hope that would be the case.

But we have not seen it yet, so we are not going to predict that.

We would hope that would be the case.

And Texas, frankly, has been a very strong area for us and for the marine industry in the first quarter.

All right, I will leave it at that.

Thanks, guys.

Tim Conder, Wells Fargo Securities.

This is actually Marc Torrente on for Tim.

Just hoping to get some additional color on US trends by region.

Are you seeing any incremental areas of weakness or concern, or any areas where channel inventories are an issue?

And then also I guess going back to the El Nino benefit, have you seen -- or how much initial pickup have you seen from I guess the boat show season out there in March and April?

How much benefit are you kind of expecting this year?

I will address several points on that one.

What we have seen, the boat shows were up a little bit this year.

But it was -- it does not correlate to this growth rate that we have seen in the first quarter.

I think that's part of the reason that we say that we think we are going to see that upper-single-digit growth.

If we look at the entirety of the US, as I have stated in my comments, we have seen pretty large growth in our market share.

In our units, we've captured 66.5% of every incremental unit sold.

From a strength point of view, Texas is up about 50%, and our market share is up pretty considerably there.

So that is a strong area for us.

Another couple of strong areas I think for the industry in general, and for Malibu, has been the Southwest in terms of Arizona, Nevada, Colorado.

Those have been pretty good markets.

Alabama has just been outstanding for us.

We made the dealer change a year ago, and that market is up 25%.

Yet Malibu was up nearly 70%, so we are just blowing away the competition in Alabama.

The weak areas are going to be -- right now what we are seeing -- and this is a little bit odd, given what we are hearing about El Nino -- California in the first quarter is down 25% to 30%.

And so that is a little bit of a surprise, and we will see what happens as we go further into the spring, and see if California becomes stronger, which I would hope that they would.

And we were talking to the California dealer last week, and they feel good.

I think they feel like El Nino is benefiting them.

I don't know how much of that is going to get pulled into this year.

The inventory levels, to your question on inventory levels, are healthy.

They are down a little bit on a weeks basis year-over-year.

The international guys have managed their inventory levels aggressively to make sure they are not over inventoried, and the US has picked up a little bit.

But that has left very little growth in inventory levels, which we are happy to see.

And so I think we feel very comfortable where inventory levels are at.

Okay, great.

And then on the timing of marketing events, it was lower expense year-over-year in the quarter.

Is that something that we could see tick up in Q4?

I don't think there's going to be a dramatic tick-up in Q4.

Okay, great, thank you.

There will be a seasonal tick-up, but not a dramatic tick-up year-over-year, I guess, to make sure I am clear on it.

Okay, got it.

Thank you.

Scott Hamann, KeyBanc Capital Markets.

Just in terms of the gross margin, can you give us like an order of magnitude of some of the big moving pieces?

The international discounting efforts -- how much was that a drag this quarter?

And then is that going to obviously I guess change in your outlook, as you are going to kind of cease that?

So just maybe for the year, what are some of the big pieces are embedded within your guidance?

Yes, so the two big drivers of that, you're going to see 10 to 20 basis points come -- of drag from the Australian business, and about 50 basis points on the international discounting currency-related stuff.

Those are the two key components.

And then on the positive side, I guess, it is pricing and mix and stuff like that?

Yes, that would translate.

If we are down slightly, that would have been about a 50 basis point gain on the -- year-over-year.

And that would have been driven by a combination of the trailer business, larger models, a little operating leverage.

It is split pretty evenly between those three things.

Okay.

And then, on the international, can you just remind us in terms of ex-Australia, what percent that is of the volumes that we are kind of looking at here?

And then kind of where Canada sits in there?

Ex-Australia in the US segment, you're about -- you are almost 20% volume in the prior year.

And so -- and with Australia representing -- or, sorry, with Canada representing about two-thirds of that.

Okay, and I think you said international wholesale was down 20%.

What kind of retail numbers have you seen there over the last few quarters?

That wholesale number is north of 20%, call it probably mid-20%s.

And we think about half of that decrease is de-inventorying, and half of that is retail.

Okay.

All right, great, thanks.

Gerrick Johnson, BMO Capital.

I just wanted to follow up on Scott's question about gross margin.

I'm looking at the components a little bit more closely.

Anything to comment on, on warranty and reserves there?

And then also on the trailer business, how is that impacting net sales per unit and gross margin in the quarter?

Thank you.

So in terms of warranty expense, we have increased our accrual rate because we increased to a five-year program, but we priced that into the new model year.

So the actual expense in the P&L is a little bit higher because, just like we offered more content in the boat, we offered more warranty.

But from a warranty experience perspective, we are not seeing anything that is increasing or materially negative, relative to the P&L.

On the trailer business, from a gross margin perspective and ASP perspective, on the ASP side, what we've seen is we thought it would be a little bit of a drag on the ASP.

And it has not been, as we have seen higher option uptake rates, because of our competitive offering.

We were able to actually deliver more to the dealer and consumer at a more efficient price.

So that has actually driven up that, or made that stay more flat to slightly up.

And on a margin basis, that trailer business is a little bit of the 50 basis points or so that I talked about, answering Scott, in terms of additive -- just being an accretive investment.

Great.

Thanks, Wayne.

Jimmy Baker, B. Riley & Company.

Jack, you talked about the geographic basis for some of your market share gains.

I was hoping you could just talk about that more from a model or segment perspective.

And then when you think about domestic inventory, you are keeping that roughly flat year-over-year, despite I think a white space model that is out, and the strong trajectory of year-to-date retail.

So I guess my question is just does that relatively conservative inventory positioning have risk of making your more conservative domestic full-year retail outlook a self-fulfilling prophecy?

Look, I think that from having the conservative inventory position, I don't think our dealers -- there is plenty of inventory in the channel.

The flat discussion, in terms of inventory levels, includes down internationally, which means we are up in the US.

So, now that is up on the unit count basis.

It is slightly down on a weeks basis.

So, I think we feel like that our dealers are appropriately inventoried, and that bodes well for our business and the health of our dealers, and the profit margins that they can make.

So, I don't think it is a self-fulfilling prophecy.

We feel like there is plenty of inventory in the channel that, if the retail demand is there, can absolutely be fulfilled.

Jimmy, one of the factors that we look at is weeks inventory on hand at a retail level, or at a channel level.

And that is right on a par with what we've seen and where we were at a year ago.

So we believe that the inventory is adequate in the channel, and it doesn't need to be inflated any further.

Jimmy, to your question on a by-model basis, what we are seeing with respect to share -- in the past six months, the Malibu and Axis performance has been very, very strong across the board.

And so, the portfolio of that Axis product and the acceptance of that brand as the leading entry player is extraordinarily strong.

So it's -- over the past six months, it has really done very, very well.

But, we are also seeing in the Malibu brand very, very strong acceptance of the 2016 product.

And that 2016 product has performed extraordinarily well, and we think positions us well in 2016 from a share perspective; as well as, as we look forward into model 2017, we are very excited about that product pipeline as well, which is heavily focused on Malibu.

So as we talk about that growth in the first quarter of 66.5% of every new unit, incremental unit, both the entry-level Axis and the premium-level Malibu far surpassed any of our competitors in growth.

Okay, very helpful.

And then can you just talk about when you made the decision to pull back on international wholesale shipments, or when the dealers signaled to you that their reorder patterns would be weaker than what was assumed in the prior guidance?

And then I guess if you could think about it this way, if you had continued at a discounting pace that would have allowed you to maintain the prior gross margin guidance, how much of an additional cut do you think you would have made to those -- to the wholesale shipment guidance?

I think, coming out of the later boat shows and heading into the Q4 operations is where we really needed to make the call in terms of taking down our expectations for those guys.

And as we got more clarity around what we believe to be the accurate US growth rate -- so it is not all international in terms of -- I think the gross margin is really driven by some of that discounting on the international side.

But also as we looked at the US market coming out of boat shows and the feel of the market, and the pace at retail and what we are hearing, I think it was the combination of all those things in the early part of spring here that made us want to be diligent about making a smart decision here.

Can you repeat your question around -- on the discounting side?

Well, just if you had continued with discounting at, I guess, more of your initial plan level that would have allowed you to maintain the gross margin guidance, how much of an additional cut do you think you would have had to make in terms of wholesale shipment reductions?

I think that is what Jack was getting at, which is we are not sure how much we got for what we gave.

I think that is what we are indicating, is we are not focused on using that to try and drive that demand.

I don't know how much more we would've had to cut to maintain, versus if we could have not cut -- given as much and still gotten the same.

Okay, sure.

Just last, I just have a quick balance sheet question.

I'm hoping you could just talk a little bit about the jump in AR.

I think your DSOs are the highest we have seen since you came public.

Now I just was interested in what those receivables are comprised of, and what drove that increase in the quarter; if it is just a timing issue.

Yes, I mean AR is most significantly, in our business, driven by boat shipments in the two weeks preceding it.

So there has -- there was probably just a big rush of shipments, and it kind of depends on what dealers it goes to.

If they do go to dealers that have -- where we floor it on the Wells Fargo commercial distribution finance, it gets flowed through faster.

And if it -- there's a couple large dealers that don't floor on that, that probably pay a little bit slower, so it is driven by a little bit of that mix, and it will [alleve] itself very quickly.

Okay.

Thanks, Wayne.

(Operator Instructions).

Rommel Dionisio, Wunderlich Securities.

Just two questions; first, and sorry if I missed this one, but I know you said that dealer inventories in the US are at a healthy level.

Is that true for both Malibu and Axis brands, or is there a little difference between the two?

And I think your comments were on an overall level.

And second is, I think you mentioned, too, that the 2017 model lineup, which we are certainly looking forward to, will be somewhat Malibu focused.

Just from a strategic sort of standpoint, the upper -- the premium end of the market has been somewhat slower growing in the last few years than the entry-level end.

So just maybe your thoughts there in terms of are you seeing something different in the marketplace or expecting something different in the marketplace over the next several years that would sort of warrant greater investment in Malibu as opposed to Axis?

Thanks.

I think on your first question, the inventory levels, we talked about it at that Malibu global level.

If we look at Malibu and the Axis brands, they are pretty equivalent.

We don't see any softness from an inventory standpoint between one brand or the other.

I think that really, as we look at that explosion of a 22% growth in the first quarter, that was fairly evenly distributed between Malibu and Axis.

That pushed at a lot of retail inventory out of that channel.

In regards to the product itself, what we did is we spent 18 months to two years really building that Axis brand.

So, going back in history little bit, a brand that began with one model in 2009, a second model in 2010, and in a period of 18 months we brought out three models and really rounded out that Axis brand.

That is really what is generating that growth that we have seen because of the acceptance of every single product in that Axis brand that we brought out.

So, as we've made that brand a complete fluid brand, then we have turned our attention toward Malibu.

And there are some key areas where we believe it is underrepresented.

There is an opportunity.

It is not quite a white space, because we do have product there.

But there is a very -- there are a couple of very key areas for us that we think that we can grow market share just as we did this year when we pinpointed that 20 foot segment.

So we believe very strongly that the areas that we focus, the product that we are bringing, is going to play very strongly in that premium market.

So that is -- it's really not necessarily that there is any shift that we see going on.

But that premium market, from a dollar standpoint, is still 70% of our total segment.

Good, thanks very much.

I am showing no further questions at this time.

I would now like to turn the conference back to Mr. Jack Springer.

Thank you very much.

Malibu again had a very good quarter, in which the improved domestic environment, our discipline, and our operational excellence drove results.

We are very pleased with the new product performance.

And based on the last six months, we are seeing good gains in all segments of our market share.

We are pleased with the results.

We want to thank you for joining our call today, and for your confidence in Malibu.

Have a great day.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.

You may all disconnect.